Gamuda deal analysis and target price

Splash stepping into FG’s shoes. Gamuda’s 40%- associate, Splash, is offering to the Federal Government (FG) and Selangor State Government (SSG) for the 4 water concessions in the state. This is higher than the SSG’s offer of RM9.2bn in July 2009 - difference is additional RM782m for Puncak Niaga and RM750m for Splash’s O&M operators, Sungai Harmoni and Gamuda Water. Since Splash is the acquirer in this exercise, we estimate that Gamuda’s cash flow gain will be limited to its 80% stake in Gamuda Water. This works out to be RM320m (RM0.16/share) assuming RM400m of the RM750m is for Gamuda Water.

Win-win deal. Splash is requesting for only 2-3% annual tariff hike (9% every 3 years) vs 37% scheduled increase for Syabas, in return for a 30-year concession starting 2010, and would reduce NRW from 29% in 2010 to 15% in 2016. This seems like a win-win deal for all parties; the spanner in the works is political will and Puncak Niaga, which offer is now 15% higher. Recall Splash and ABASS accepted the SSG’s offer in July 2009, but the deal fell through because the other two operators rejected it. For the broad water sector, the deal would end the legal suits between the operators, appease consumers with muted tariff hikes, and it would not burden the FG’s already stretched balance sheet and end the 3-year dead lock.

Maintain BUY, expect re-rating. Despite risk of another false start, the deal is positive for Gamuda on 3 counts: (i) potential special dividends - if Gamuda pays out half the RM320m, investors could gain a one-off 3% yield despite Gamuda potentially having to fork out more cash if Splash calls for a rights issue; (ii) spillover of construction/upgrading works for the water distribution network, and opportunity to clinch other portions of the Inter-State Water Transfer Project, and (iii) with Splash controlling the water industry and the O&M operators, Gamuda will have a larger earnings base.